What does 'real effective exchange rate' measure?

The 'real effective exchange rate' measures the value of a currency adjusted for inflation against a weighted average of other currencies. This adjustment takes into account the relative price levels between countries, allowing for a more accurate comparison of purchasing power and competitiveness. By factoring in inflation, it reflects the true value of the currency in real terms, making it useful for assessing a country's economic position relative to others. This realignment helps in understanding whether a currency is overvalued or undervalued in the context of international trade and economics.

In contrast, the other options do not encompass this meaning. The immediate value against commodities pertains more to spot rates rather than an effective exchange rate that adjusts for inflation. An average exchange rate over a specified period would refer to a simpler calculation not considering inflation or price level differentials across countries. Lastly, the nominal value of a currency without adjustments fails to provide the nuanced view of economic performance required in a globalized economic landscape, which the real effective exchange rate effectively captures.